“For Heaven’s sake heave out the ballast!” “There! the last sack is empty!” “Does the balloon rise?” “No!” “I hear a noise like the dashing of waves! …”
Jules Verne, Mysterious Island
For the first decade of my career, I had worked in branch offices of a growing, “Fortune 50” information technology company. I was not prepared for the transition I was about to experience. The moment I decided to take on the new entrepreneurial opportunity, the exhilaration of being recruited was suddenly over. On the appointed morning, I resigned and left a multi-storied, concrete, steel and glass office building, and drove out of my heated underground parking garage for the last time. Five minutes later I arrived at a lot next to the Fireweed Theater. My new business was located in what only could be described as a run-down strip mall.
Well before I met an employee, I knew that there was little enthusiasm left in the workforce. As I walked across the parking area to enter the store, I picked up a crushed coke cup and popcorn tub discarded by a theater patron. Then I noticed the retail stores’ 20 foot high outdoor changeable-letter sign; there was no message on the sign for the passing traffic. I opened the door and could see computers on display that were obviously not demonstrable. I didn’t know much about the retail computer business, but I knew that these were not indications of esprit de corp.
My partner introduced me to the sales team leader as simply “our new president” — we skipped the ownership description for later. Jon quickly headed back to our corporate office, and the sales manager took care of the rest of the introductions. I spent most of the first day in one-on-one meetings with our associates. I could tell that energy had to be mustered by most associates for a conversation with the “new guy”. Eye contact was hard to come by; employee attitudes seemed to range from deeply pessimistic to cynical. This was no surprise; those remaining on the payroll had endured a multi-quarter cash crisis, a sequence of layoffs, pay freezes and reductions, and a number of executive transitions. The more imaginative staff members were working on theories to explain why I had left such a fine career to join this organization, and whispering about how long I might last. The same thought may have crossed my mind.
Jon Peacock and I met late that afternoon at the TransAlaska Data Systems corporate offices – which I had learned that day was nicknamed the “Death Star” by our employees. Jon greeted me and asked, “How did the day go?” I smiled and let Jon know that my impression was some of the employee attitudes seemed like they “would have to get better to be bad.” After a good laugh, we sat down for the next few hours with a stack of interview notes, and a well-worn Scott McMurren article from Alaska Business Monthly on survival. We exchanged views gathered from our ten years of experience and opinions on the current state. We then outlined the seven steps we would follow to get the business back on track.
Step 1 – Establish familiarity with the turnaround process by defining a plan.
We were going to make sure everyone knew that we were unusually committed to the organization – we had literally bet everything we owned on the companies’ success. Most importantly we wanted to communicate that Jon and I, and our new board of directors, were experienced with business cycles, turnaround efforts, and confident in the future.
Step 2 – Recognize reality.
Just like many organization that had missed multiple quarterly performance expectations, we needed to do our laundry and fully disclose to stakeholders the true status of the books. We knew the first sign of an impending turnaround was recognition or write-down of all:
• Under-performing initiatives,
• Over-valued assets, and
• Hidden unreported expenses.
Our borrowing base formulas with the bank posed a logical barrier to an overzealous effort at marking our assets to value. Notwithstanding borrowing base management concerns, a very large asset write-down and full disclosure to all concerned was the right start at establishing credibility with our new board, financial stake-holders, and employees. And an accelerated depreciation schedule would take care of the rest. One additional benefit would be that our true performance would be reflected in each new financial report going forward.
Step 3 – Most importantly, get control of cash.
We had to stop the hemorrhaging of cash. Bold action was needed immediately. Jon and I decided on three principles to our cash control program.
• The reduction of our salaries and the elimination our management bonuses would precede any further reductions in staff.
• Any reductions in staff would be deep and one-time, and when possible the changes would focus on performance and those with unsalvageable attitudes.
• A comprehensive expense reduction plan would be put into place.
To establish the reduction objective, all programs and locations, including “sacred cows”, were to be reviewed carefully. Expense reductions were going to require:
• Combining accounting and administration into one department for all locations,
• Consolidating warehouse locations,
• Renegotiating all leases,
• Review of all contracts and discussions with all vendors,
• Restructuring the benefits programs,
• Collapsing management levels,
• Merging, centralizing, or eliminating some practices, and
• Once we were fully engaged up-market, getting out of the retail business altogether.
We knew that unless the hemorrhaging of cash was stopped, the firm was still heading to the brink.
Step 4 – Raise cash.
We were making every effort to quickly put the 1.1M bank line of credit in place and execute the GCI loan for 400K. Together these loans would improve the borrowing base and cash on hand, and support our sales objectives.
Moreover, we were going to work our internal sources and uses equations by:
• Improved billing and A/R disciplines to correct the 75 day DSO condition (i.e. Collect early),
• Increase trade credit (i.e. Gain terms to pay vendors late and put more on trade credit),
• Explore sale-lease backs to produce a capital infusion on internally deployed assets, and
• Outsource sales process to consume less working capital (for example – PC manufacturer and reseller programs would soon emerge that would reduce working capital requirements in Higher Ed and K-12, and other institutional accounts).
We further planned, if necessary, to approach a list of investors on a secondary offering. We knew our firm would remain on the edge of failure unless adequate cash was raised and solid creditor agreements produced an effective level of working capital.
Step 5 – Recover credibility with associates, investors and creditors.
We were intent on accomplishing everything we said we would when we said we would. This started with the discipline to make only commitments we could keep. One objective was to deliver on time the aging reports, financial reports, ratio stats and payments to creditors. Another was to drive A/R and inventory down. We also knew of two slam-dunk initiatives we could promote to establish a pattern of promises made and met: loan agreements and a new office location.
• Loan Agreements
Since we were within a few months of executing new credit agreements, we would state to our associates we were making every effort to close these loan agreements. Once these were closed, we knew there was value in the announcements of our success to the workforce. The dourest of our business partners, the banker, and a savvy telecom company were expressing confidence in our business plan with these loans. That would make a powerful statement to even our most skeptical associates.
• New Office Location
We were 120 days from relocating to new office facilities. We would announce our intent to find and execute a new 10,000 square foot office lease in a highly desirable section of the city. Leases of this nature would only be provided to a creditable firm. An impressive new office would be a tangible statement to clients and competitors that we were committed for the long term and planning to grow. An upscale lease would significantly impact employee esprit de corp. All of our Anchorage associates would soon be under one roof. An outdoor changeable-letter sign would not be part of the new image.
And we identified two far-fetched goals that would motivate our associates and disclose our primary strategic objectives. We were moving our focus up-market, and we intended to emphasize IT service revenue.
• Our target market was going to shift to corporate and institutional accounts —
We intended to pursue and capture the largest and most prestigious client relationships in Alaska, including British Petroleum, Arco, the State of Alaska, the Department of Transportation, and the University of Alaska. Our first step would be to put every bit of our effort into the State of Alaska and University of Alaska bids. And we would express confidence we were going to be highly competitive in enterprise and institutional accounts, and would win our share.
• Our emphasis was going to change to IT service delivery —
We were going to get organized around selling and delivering IT services to large accounts. We were confident we could show progress on both of these objectives.
Step 6 – Work to show a profit.
We began to identify the overlooked positives in our organization. We looked for programs that competitors and peers had successfully implemented. And we immediately began to take these steps:
• Recruit back key associates we had lost that would drive revenue,
• Retain the key associates who were considering departure,
• Add new practice opportunities,
• Create more effective business process, and
• Focus management’s attention on closing the largest accounts.
Step 7 – Execute. Execute. Execute.
Jon and I knew we needed to produce action and measurable results on a short set of priorities. It was our job to communicate, allocate limited resources, deliver our attention to these high profile objectives, and close the gap between early and late adapters of announced change with personal promotion. On achievement of measurable results, we were committed to rewarding those that made the difference. We wanted to make execution an organizational habit, ensuring implementation predictably followed announced change.
These seven steps were not invented by the two of us. We were following a process that corporate managers are trained to apply to underperforming entities, and any number of business authors had described. This sequence of action is so predictably employed that it is the basis for investor models that are used to pick value investments such as the “Dogs of the Dow” or “Dow-Dividend” approach. The “value opportunities” in the Dow 30 are obvious; as the share price declines, the dividend will grow as a percentage of the share price. Calculate the five or six highest dividend yields in the Dow 30 to identify the value stock picks. Investors know these under-performing firms will face unrelenting pressure for management action from shareholders and directors, and follow a very similar sequence to improve the firm’s performance. If not, the directors will eventually replace the leadership, or the shareholders the directors, or the market the firm.
The obligation is the same for the principals and executives of smaller enterprises. Instead of public shareholders and bondholders, the requirement to act emanates from the stake-holders of the small enterprise:
• The principals, investors, and board members,
• The vendors,
• The bank and other lenders, and
• Career minded employees.
Jon and I understood that if we did not take action, less familiar business professionals would do so on a “post-petition” basis. However, then it would be accomplished with less understanding of the circumstances, less experience with the firm, and less empathy for the employees. We had to step up, get the job done, and by doing so earn the confidence of the team.
We stepped back from the brink by: (1) Assembling an experienced team, (2) Disclosing to stakeholders the true status of the books and getting the accounting corrected, (3) Gaining control of cash, (4) Raising cash, (5) Recovering credibility with associates, investors and creditors, (6) Working to show a profit, and (7) Executing our plan. The economy soon recovered, and the key employees regained confidence in the organization and each other. This core group of associates was instrumental in building the company from a firm on the brink into the regional leader. Their efforts produced the critical funding source and business model used to develop a profitable, fast growth national enterprise.
©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: Egalitarian Ownership.
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Sometimes the Bull Wins 